Brazilian President Luiz Inacio Lula da Silva has said he will raise the country's minimum wage by 8.5%.

The increase takes the monthly minimum salary to $177 (134 euros, £90) and is well above inflation, but much lower than the demands of labour unions.

During his election campaign, Mr Lula pledged that the country's poor would be his top priority.

The decision to raise the minimum wage is his first major policy decision since he was re-elected in October.

Costly move

Mr Lula has signed an agreement which will raise the minimum wage more than five percentage points above inflation.

The finance ministry, which has favoured a cautious public spending programme, wanted a more modest rise, while the unions had asked for a 20% increase.

Even though it will add only about $7 a month to each minimum wage, the increase is expected to cost the government more than $400m (304m euros, £204m) a year, as millions of Brazilian workers have their salaries pegged to the minimum.

Mr Lula signalled his determination to control public spending by threatening to veto any attempt in the Congress to increase the minimum wage above the level set by this agreement with the unions.

Even so, critics of the government say the rise will make it difficult for Mr Lula to keep promises of an austere period of spending, while at the same time offering tax breaks to stimulate investment in Brazil's crumbling infrastructure.